Will EUR/GBP Break 80 Cents?

The traditionally slow moving EUR/GBP pair enjoyed strong gains today on the back of major sterling weakness. For the second day in a row, sterling was the worst performing currency. Part of the decline was due to risk aversion but weaker economic data also weighed on GBP. Consumer prices grew a less than expected 0.2% in the month of February. This modest increase left the year over year rate unchanged at 0.3%. Inflation is drastically undershooting the central bank’s 2% and while the recent rise in oil prices will ease some of the decline, this level of inflation growth will prevent the Bank of England from raising interest rates anytime soon. Meanwhile Brexit risks are rising. Chancellor Osborne and London Mayor Johnson will be speaking to Parliament on Wednesday and Thursday about the costs of Brexit and chances are the headlines won’t help the currency. At the same time, we don’t believe the Brussels attack will have a lasting impact on euro. As we saw in November and January of 2015, investors don’t allow terrorists to terrorize them for long. The euro fell only 3 cents after the shootings in November and primarily on expectation for ECB action. In January after the Charlie Hebdo attack, EUR/USD fell only 1 cent in the week that followed. It later collapsed but only because investors were positioning for ECB Quantitative Easing. Central bank expectations is what makes the current outlook for the euro different from 2015. No one expects the ECB to react to the latest attacks after having taken aggressive steps earlier this month and this means losses in the euro should be limited. European data is just beginning to turn positive and any pullback in EUR/USD should be limited to 1.1050. The Eurozone PMI reports were released early and they showed improvement in service and manufacturing activity. Although investor confidence weakened, German business confidence ticked higher, a sign that the ECB’s efforts are finally paying off.

Technically the recent rise in EUR/GBP has taken the currency pair within pips of its 1 year high of 0.7930, which happens to coincide with the 50 month SMA. Considering that the move also required a break above the 61.8% Fib retracement of the 2007 to 2008 rally, there’s a reasonable chance that this high will be broken and 80 cents will be tested. However a break above 0.8030 could be more difficult as this was where the currency pair peaked between August and November 2014. T is also the 38.2% Fib of the 2008 to 2015 decline.